Forget BJ’s Restaurants, Buy These 3 Restaurant Stocks Instead

Shares of BJ’s Restaurants BJRI have lost 32.9% over the past six months against the Zacks Retail – Restaurants industry’s rally of 13%.

Although BJ’s Restaurants is focusing on cost savings and has reduced cost of sales and labor expenses; pre-opening costs, higher marketing expenses and costs related to sales-boosting initiatives might weigh on margins. Particularly, slow roasting ovens and handheld tablets are bumping up costs for the restaurateur. The company is also facing high general and administrative expenses which increased 9% year over year in 2018.

Also, lack of check growth and severe weather conditions have made the company slightly apprehensive of earnings growth in 2019. The lower-than-expected check average is due to certain marketing programs that may affect traffic and higher levels of redemption for a holiday gift card bounce-back promotion.

If this wasn’t enough, BJ’s Restaurants, a Zacks Rank #4 (Sell) company, has limited international presence that makes it more susceptible to competition. While several other restaurateurs including Yum! Brands YUM, McDonald’s MCD and Domino’s Pizza DPZ are capitalizing on emerging market opportunities, BJ’s Restaurants seems to be slow on this front. We believe that the company needs to expand beyond the United States in order to offset the impact of competition in the saturated domestic market.

Over the past 30 days, the Zacks Consensus Estimate for 2019 earnings has been revised downward by 10.8%. Earnings for the current year are estimated at $2.15, suggesting an 8.5% decline from 2018.

With its share price taking a hit and estimates moving south, it would not be prudent to retain this stock, at least for the time being.

The Restaurant Industry at a Glance

Since the fourth quarter of 2017, the U.S. restaurant industry has been showing slow but steady recovery. According to TDn2K’s The Restaurant Industry Snapshot, the sales recovery is likely to stay through 2019.

The industry is likely to get support from increased consumer spending and restaurateurs’ focus on digital innovation. According to a Restaurant Business article, the fast-casual restaurant space is likely to record sales growth of 8.3% in 2019 compared with 8% in 2018. Casual dining is expected to see a 3.4% uptick in sales this, up from last year’s 3.2%. Fine-dining restaurants will also see a 5.2% growth compared with 5% in 2018.

However, the industry is not totally out of harm’s way. Although sales started recovering from the fourth quarter of 2017, the industry has been bearing the brunt of declining traffic and intense competition.

Per an article by Bloomberg, the restaurant industry is expected to face near-term concerns such as rising food and wage costs which will eat into profits. Moreover, recent data shows that there is an oversupply of restaurants in the United States, inducing fierce competition among operators. Sectors like grocery store prepared food and convenience stores also pose a threat. Intensifying competition has compelled Starbucks Corporation SBUX to shut down some U.S. outlets due to over-saturation worries.

Persistent erosion in traffic is another pressing concern. Same-store traffic in chain restaurants has been negative and is expected to continue to deteriorate in the near term. Traffic dropped 1.9% in 2018, per the TDn2K’s The Restaurant Industry Snapshot.

Restaurants to Serve Treats in 2019: 3 Picks

The primary growth of restaurateurs in 2019 is likely to stem from an increasing influence of digital and delivery sales. With the ever-growing presence of Internet and smartphones, analysts expect 25% of all restaurant sales to come from digital ordering and delivery over the next four years, per a report by Forbes. Moreover, the overall economic scenario is conducive for restaurant stocks.

Starbucks carries a Zacks Rank #2. The company has been undertaking digital initiatives to better serve customers. The Zacks Consensus Estimate for current-year earnings is pegged at $2.72, reflecting a year-over-year increase of 12.4%. Also, over the past two months, earnings estimates for 2019 have been revised upward by 3%, reflecting analyst optimism.

Darden Restaurants, Inc.DRI, a Zacks Rank #2 company, banks on various sales-bolstering initiatives and cost-saving efforts to drive growth. Earnings for fiscal 2019 are expected to grow 18.3% year over year, per the Zacks Consensus Estimate.

Brinker International, Inc.EAT is investing heavily in technology-driven initiatives, like digital ordering, to boost sales. The consensus estimate calls for current-year earnings of $3.85, reflecting growth of 10% from the year-ago level. Brinker carries a Zacks Rank #2. Earnings estimates for fiscal 2019 have also risen more than 2% over the past two months.

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